Thursday, December 6, 2007

Subprime Bailout Plan - If You Have to Ask, It Isn't Shock and Awe

Now today was the kind of day that is exciting! The blogosphere is on fire with commentary, analysis, and feedback. This is the main reason why I get all my news online. There is simply no other place that you can get real time information as well as active discussions involving experts, scholars, and financial small timers like myself.

Subprime Bailout Plan - If You Have to Ask, It Isn't Shock and Awe
Remember on the eve of the start of the second Iraq War, the military said that the use of "shock and awe" would end the conflict swiftly? Remember how the early going was anything but? That's my reaction to the Subprime Rate Freeze Plan that was detailed today by the same administration. Touted as a tool to help troubled borrowers across the country, the plan is laughable as a useful tool of any scale. Indeed, if you have to ask it isn't shock and awe!

The Plan
Tanta over at Calculated Risk has an enormously long post on the finer legal and technical aspects of the plan (warning: easily will take over 15 minutes to read entirely)
Punchline: "Let's not make this harder than it is. What this is about is taking, say, a 2/28 ARM and turning it into a 5/25 ARM (rate fixed for five years instead of rate fixed for two years)."
There was allot of detail provided, but the take away points are both extremely limiting and laughable all at once
(lifted from Housing Panic (
* Mortgage had to be issued between January 2005 and July 2007
* ARM must reset January 2008 to July 2010
* You must not have more than 3% equity in your home
* Home must be worth more than the mortgage
* You must have income
* You must prove that you can make the payments
* You must not be more than 60 days past due
* Program is voluntary with the lenders - government has no authority or legal status

From my trusty back of the envelope calculations, I would hazard a guess that maybe as low as 20,000 people could possibly qualify, and a high end around 50,000. The MAJOR stumbling block is going to be the "Home must be worth more than the mortgage" qualifier. That one by itself will severely limit any deal making.

What's it All Mean?
The Cardinal rule that they teach you in fancy management schools is this; "In a crisis situation, you CANNOT be perceived as doing nothing. Any action is better than no action in this circumstance." That about sums it up. This action was done for the following reasons to varying degrees:
  • Extends a new lifeline to troubled banks and lenders by giving the appearance of an improvement in the situation
  • In a similar manner, prop up stock prices going into years end
  • Make an effort to appeal to voters so the Republican party is not hurt in the coming election
  • Restoration of some confidence in the system

I am not saying that any of the above will be accomplished. Certainly long term none of it will. But this was not a long term plan. It is a concerted effort to change the headlines for a while. In that it may be effective. Witness the market rally today. The plan will take a long time to make any improvements, and on a limited scale, but mortgage and home stocks like CFC and TOL were bid up aggressively for no reason. Wall Street never met a rally it didn't like, not even one with an STD.

Doom and Gloom Fix

If you are of the sort that likes to read behind the scenes information, there was a great post today over at Herb Greenberg's MarketWatch blog. Mr. Greenberg has been in contact with a mortgage insider through correspondence for some time, and the letter he posts today is the most clear and honest picture of the issue going forward I have ever seen. It is a must read and I will not forgive anyone that does not take a look:

That's it for tonight. Fun day today. Please leave some comments and keep the discussion alive. I also have a new poll up, so please vote!

Have a good night.


Anonymous said...

This might work for a few borrowers in the midwest but it isn't going to do squat in the bubble areas where most of the problems are. This is from one of the realators who has been on top of this mess for several years in CA.

The federal government has stepped in to broker an agreement among subprime borrowers, servicers, and mortgage-backed investors to freeze their subprime interest rates for five years. To quailfy you had to have received your subprime loan since January 1, 2005 and the balance has to be lower than the value of the house.

There is no chance that this will have any positive impact on our real estate market in San Diego County. None, nada, zero.

The subprime loans are in areas already beset with foreclosures, and values have already plummeted below their loan amounts - even lower than the first mortgages that were 80% of the purchase price.

Not only is this Big Brother sticking his nose in where it doesn't belong, it is clearly anti-California. Once again, the federal government does nothing ot help those in our state.

California should secede from the Union immediately.

No doubt that the NAR will back the plan too, but they should sue over it being anti-realtor. All this illusion will do will put more crazy thoughts in sellers heads that they should hold out - and wait. That will cause more standoff in the marketplace, causing sellers to be faced with the inevitable a few years later - when it'll probably be worse.

Buyers will be disheartened that their prudent decision-making will go unrewarded - again. Is any of this bailout talk going to cause buyers to buy?

Thankfully, the economic forces of supply and demand will still be intact, and the market will take it's natural course.


Debbie B said...

thanks for the link to that article. Scary times. -Deb